Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Vince Cable, the UK’s “business secretary” is
famous for promoting two mutually exclusive ideas. One is that there is too
much debt, e.g. see here
and here.
And the second is that banks should not be too heavily regulated. E.g. see here
or here.
Spotted the self-contradiction? No? Well it’s like this.

Banks are in the business of debt creation. That is,
as far as banks are concerned, the more money they can lend the better. And if
they make silly loans, well they aren’t too bothered because they know the
taxpayer will pick up the pieces if it all goes horribly wrong.

And of course that’s why governments regulate
banks: so as to minimise taxpayer exposure.

So the less regulation there is, the more debt
there is. So what does the old duffer, Vince Cable want? More debt or less
debt? Darned if I know.

He should keep his gob shut and stop wasting
everyone’s time till he’s thought up some sort of coherent policy on this
subject.

Thursday, 29 May 2014

Guido Ravoet of the European Banking
Federation in a letter in the Financial Times today claims “…banks hold
significantly more safe capital and there no longer is a need to call on
taxpayers if a bank fails.”

Absolutely hilarious.

Either Ravoet is clueless or he is
lying. And in case you’re tempted to question the possibility that senior
bankers are clueless, a senior executive at Santander admitted a year or so ago
that she knew nothing about banking. And the same seems to be true of several
people at the top of the UK’s disaster prone Coop Bank.

Anyway the flaw in Ravoet’s above
claim will doubtless be obvious to most FT readers and anyone else with a basic
grasp of bank balance sheets. The flaw is thus. (It’s amazing / tragic that I
even need to spell it out).

Bank capital ratios in recent years
have been around the 3% level, which means that if the value of a banks’ assets
falls by more than 3%, the bank is technically insolvent. Of course the bank
does not have to close its doors at that point as long as it thinks it can
recover. But the more the value of assets fall the more suspicious the bank’s
creditors become, and the more the chance a Lehman’s type event.

Now if a bank’s capital ratio has
been improved from say 3% to 6% as a result of recent capital ratio
improvements and all its other liabilities (just to keep things simple) consist
of depositors and it goes bust, then where does the money come from to
reimburse or safeguard those depositors?

It comes from taxpayers, just as in
the case of the 3% ratio. Of course, improved capital ratios reduce the CHANCE
of a bank failing, but they don’t remove the POSSIBILITY of it failing with
taxpayers being forced to pick up the pieces.

In short, in short, Guido Ravoet is
talking thru his rear end.

_________

P.S. (31st May 2014). Just in case you
think the word “liar” is too strong to use in reference to a representative of
the banking industry, remember that J.P.Morgan is the biggest criminal
organisation in the US: at least if one goes by the size of fines imposed on
different organisations ($20bn in the case of JPM). Also see here
and here.

This article by Positive Money
claims that if government created all money, we’d have billions more to spend
on health, education (and/or tax cuts). It sounds too good to be true, and it
is.

I support Positive Money mainly
because they advocate full reserve banking. But no two economists, amateur or
professional, agree on everything, and I don’t agree with PM’ ideas on seigniorage.
The first 2/3rds of the PM article is reproduced below (in green italics)
interspersed with my comments.

The Bank of England still prints paper money (e.g. £10 notes). Because it
only costs a few pence to print a £10 note, the government makes a profit on
every single bank note that it prints. Between 2000 and 2009, this profit on
newly-created money added up to £18 billion – enough to pay the salaries of
around 90,000 nurses over that time.

More or less correct so far. That is,
government can print extra money and spend it on whatever (and/or cut taxes)
assuming the economy has spare capacity.

But the Bank of England only creates the paper money, and leaves it to
banks to create the electronic money that we also use every day. When banks
create money, they – not the government or the taxpayer – get the benefits of
creating that money.

Now hang on: a commercial bank (“commbank”)
when it monetises an asset cannot simply spend the money on wild parties for
bank staff. In fact private banks just don’t spend the money they create: of
course they charge interest and charge for the administration costs involved in
that process and something to pay bank shareholders a dividend, but that’s it.
That might typically come to roughly 5% of the total amount of money created
per annum.

From 2002 to 2009, banks increased the amount of money in the UK by £1
trillion through lending (with every new loan creating new money). Because this
money was created by banks, it’s the banks that get the benefit from it (in
this case, the interest received on £1 trillion of additional loans).

Approximately correct. Thought strictly
speaking, commbanks only charge borrowers interest because those banks have to
pay interest to those who fund banks: depositors, bond-holders, shareholders,
etc. In addition, commbanks obviously charge for administration costs as
mentioned above. But that distinction between what might be called “genuine
interest” and administration costs is perhaps a minor technical point.

If the government had created this money instead of the banks, taxpayers
would have been able to pay up to £1 trillion less taxes: approximately £33,000
for every person who pays income tax over just 7 years.

Nope. Serious and major blunder
there. As I pointed out above, commbanks do NOT SPEND the money they create. Thus
if taxes are reduced by £1 trillion, then total or aggregate spending for the
economy as a whole would rise by £1 trillion. Inflation would go thru the
roof!!!! (Incidentally, I’m assuming for the sake of simplicity that when a
household’s taxes are cut by £X, it’s spending rises by £X. Obviously
households SAVE a proportion of any increased after tax income. Thus the rise
in spending might be, at a wild guess, 75% of £1 trillion rather than £1
trillion. But still, inflation would go thru the roof.)

Put another way, if private money
production had been banned at any of the periods since WWII when the economy
was at capacity, where exactly is the capacity supposed to come from to meet
the extra demand stemming from that extra trillion being spent? I’m mystified.

Because the profits from creating money currently go to the banks instead
of to the government, the government has to borrow much larger amounts of money
to make up for this lost income.

Nope. To repeat, private banks do not
spend the money they create. Thus if private money creation is banned, there is
no magic pot of extra money for government to spend. And as to the fact that
those who borrow from commbanks spend what they borrow, that spending must be
matched, all else equal (or assuming constant GDP) by others who spend less. In
fact those “others” are the people who deposit money in banks for extended
periods (i.e. who save or abstain from spending). (Rather than the latter
constant GDP assumption, another more realistic assumption would be that the
economy is at capacity and GDP is expanding at it’s average 2%pa or so and that
it cannot expand faster as a result of extra demand coming from the above
borrowing.)

The real flaw in private money
creation is thus.

Commbank created money is a liability
of such banks: a liability consisting of a SPECIFIC NUMBER of pounds / dollars.
In contrast, commbanks’ ASSETS can decline in value dramatically (when they
make silly loans). And when they do decline far enough, the bank is bust.

Indeed, assuming the 3% or so capital
ratio that has been common in recent years, a commbank’s assets only have to
decline by 4% in value, and the bank is technically insolvent: an absurd
arrangement.

So to deal with that weakness or
absurdity in our existing banking system, governments pile one absurdity on
another: that is, to deal with the above inherent weakness in the current
system (i.e. private money creation) governments stand behind or subsidise
banks.

So . . . . dispose of private money
creation (i.e. implement full reserve banking) and the tendency of banks to
suddenly collapse disappears, second credit crunches stemming from those collapses disappear and third the need for bank subsidies disappears.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

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MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A